On notice

Watch out for changes in terms of credit-card agreement

BOSTON (MarketWatch) -- The letter promised Robert from Glendale, Calif., that his credit card was being "improved." The question he had, after reading about the changes, was just who the "improvements" really benefited.

While the cover letter sent by his card company talked about adding "special services" such as same-day online payments to Robert's account, the enclosed document changed the terms of his credit agreement, specifically raising fees for late payments, going over the credit limit and more.

Late fees, according to the credit terms, were going to a fee scale based on the outstanding balance of the account. If the balance on the account is $250 or more, the late fee is now $39. If the account balance is $100 or less, the late fee is just $15. Likewise, overlimit fees are moving to a similar scale, with the $39 charge applying to accounts where the outstanding balance -- the limit that is being exceeded -- is just $1,000, an amount small enough that the card issuer is virtually guaranteed of getting the maximum fee.

Then there was the new "default rate," which is what Robert could face if he is late with a payment or goes over his limit. The default rate on the card is a hair under 25%.

Robert's question was a simple one: "Can they do this?' The answer is "They can, and they do all the time."

When you accept a credit card, you get it at the terms promised by the offer. But you also sign an agreement that allows the issuer to change those terms pretty much at will, so long as you are properly notified. Those updated card agreements may come in statements or in separate envelopes like the one sent Robert, but they typically are full of fine print and go unread.

The consumer like Robert who actually reads one basically has two choices for the affected card: Choke down the new terms or contact the issuer to say the new deal is unacceptable, at which point the card issuer will freeze the account at its current terms. The card can't be used to make future purchases, but at least the terms don't deteriorate.

But as Greg McBride, senior editor for Bankrate.com notes: "If they send you a new disclosure and you don't read it and then go use the card, that next purchase is tantamount to acceptance of the new terms. By swiping your card, you could be accepting terms and have no idea what those terms are."

No matter your card issuer, chances are good that those terms are deteriorating. Industry statistics indicate that card issuers collected more than $16 billion in penalty fees last year, with 70% of those dollars coming from late fees. Those fees are rising steadily. In 1994, the average late fee was about $12.50; it rose to roughly $27 in 2000 and was more than $34 last year, according to the Bankrate Web site.

Bounced check fees, overlimit fees and virtually all transaction and balance-transfer fees are on the rise too.

Hit from all sides

Most industry studies now show that about 40% of all card issuers use universal default clauses, which allow the card issuer to raise rates when the cardholder is late with a payment to any lender. That means that getting into trouble and racking up those penalty fees with one card issuer can create problems with every other firm a consumer does business with.

"Anyone who is having trouble paying their bills right now is really in trouble, because it starts with a late fee, and then there is the default rate, and then the rates change on their other cards, and it's just one thing after the next," says Gerri Detweiler, author of "The Ultimate Credit Handbook." "Things can get bad really quickly."

To avoid being sucked into that whirlpool of financial trouble, experts suggest taking a few precautionary steps -- beyond simply avoiding debt in the first place -- and warn that while a new account agreement like Robert's can provide a reason to make this journey, any consumer can benefit from knowing more about their cards.

1. Learn the precise terms for each card, for every condition that might apply to you

Consumers should know the late fees, overlimit rules, balance-transfer and cash-advance fees, as well as the default rates and conditions under which the lender might move to those higher charges.

Because lenders make about 70% of their income from fees, you can bet they are looking for ways to generate those payments. Someone who is near their credit limit might ask for approval to complete a purchase that puts them past their number; the lender can approve it, but may in fact be offering it in order to deliver the high overlimit fee.

"If you know how all of the fees work, you can avoid the problems," says McBride.

2. Check your statements to see the current terms being applied

Because universal-default rules are so popular, you could see rates change on an account that has never experienced a late payment. So check the terms -- and not just the outstanding balance amount -- on each statement. Your credit-card agreement may show the fine-print rules changes, but the numbers on your statement show what you're facing in cold, hard statistics.

3. Schedule regular minimum payments

Because lenders take their money around the same time of the month, payments should be easy to make. But many consumers have a tendency to wait a little longer, hoping to get the best possible timing between the bill coming due and the paychecks coming in. That's a horrible strategy if it results in missed payments.

Experts suggest scheduling regular minimum payments if it keeps a consumer from racking up late charges. You can always go back and pay above the minimum at a later date, more in sync with the paychecks, but you stay out of the most dangerous territory.

4. Consolidate card debt if you can

Some consumers use multiple cards so that their balances remain relatively small. That can be effective in helping to reduce debt if the consumer can make payments to all issuers on time. If those payments are making things tight, however, the consumer would be better off consolidating the debt; the fewer monthly payments to make, the less the exposure to potential late fees and other problems.

Paul Richard, director of education for the Institute for Consumer Financial Education, noted that consumers might even consider consolidating at a slightly higher rate if it means avoiding the late charges. "Pay a late fee and have a card go into universal default and you've lost a lot more than the difference you get saving a few points on the interest rate. ... People really need to find the card deal that works best for them."

5. Call the card issuer

If you anticipate trouble, you might want to call the creditors to see if you can work out a modified payment plan. Make sure that if the firm agrees to it, that they will not sock you with heightened late fees or other problem charges. At this point, you are one step away from finding help, in the form of a credit-counseling service to help you mitigate the situation and get a fresh start.

"Once you get hit with these fees, it becomes harder and harder to stop," says Richard. "You definitely want to talk to the lender before you get that far into it."

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